Académique Documents
Professionnel Documents
Culture Documents
com/ifrs
Introduction
More detailed guidance and information on these topics can be found in the
‘IFRS manual of accounting 2013’ and other PwC publications. A list of PwC’s
IFRS publications is provided on the inside front and back covers.
Contents
Accounting rules and principles 1
1. Introduction 1
2. Accounting principles and applicability of IFRS 1
3. First-time adoption of IFRS – IFRS 1 2
4. Presentation of financial statements – IAS 1 3
5. Accounting policies, accounting estimates and errors – IAS 8 7
6. Financial instruments – IFRS 9, IFRS 7, IAS 32, IAS 39, IFRIC 19 8
7. Foreign currencies – IAS 21, IAS 29 18
8. Insurance contracts – IFRS 4 19
9. Revenue – IAS 18, IAS 11, IAS 20 20
10. Segment reporting – IFRS 8 23
11. Employee benefits – IAS 19 23
12. Share-based payment – IFRS 2 26
13. Taxation – IAS 12 27
14. Earnings per share – IAS 33 29
Other subjects 51
Industry-specific topics 57
1 Introduction
There have been major changes in financial reporting in recent years. Most
obvious is the continuing adoption of IFRS worldwide. Many territories have
been using IFRS for some years, and more are planning to come on stream
from 2012. For the latest information on countries’ transition to IFRS, visit
pwc.com/usifrs and see ‘Interactive IFRS adoption by country map’.
The IASB has the authority to set IFRSs and to approve interpretations of
those standards.
The concepts underlying accounting practices under IFRS are set out in the
IASB’s ‘Conceptual Framework for Financial Reporting’ issued in September
2010 (the Framework).
An entity moving from national GAAP to IFRS should apply the requirements
of IFRS 1. It applies to an entity’s first IFRS financial statements and the
interim reports presented under IAS 34, ‘Interim financial reporting’, that
are part of that period. It also applies to entities under ‘repeated first-time
application’. The basic requirement is for full retrospective application of all
IFRSs effective at the reporting date. However, there are a number of
optional exemptions and mandatory exceptions to the requirement for
retrospective application.
The exemptions cover standards for which the IASB considers that
retrospective application could prove too difficult or could result in a cost
likely to exceed any benefits to users. The exemptions are optional. Any, all
or none of the exemptions may be applied. The optional exemptions relate to:
• business combinations;
• deemed cost;
• employee benefits;
• cumulative translation differences;
• compound financial instruments;
• assets and liabilities of subsidiaries, associates and joint ventures;
• designation of previously recognised financial instruments;
• share-based payment transactions;
• fair value measurement of financial assets or financial liabilities at initial
recognition;
• insurance contracts;
• decommissioning liabilities included in the cost of property, plant and
equipment;
• leases;
• service concession arrangements;
• borrowing costs;
• investments in subsidiaries, jointly controlled entities and associates;
• transfers of assets from customer;
• extinguishing financial liabilities with equity instruments;
• severe hyperinflation;
• joint arrangements; and
• stripping costs.
Current and non-current assets and current and non-current liabilities are
presented as separate classifications in the statement unless presentation based
on liquidity provides information that is reliable and more relevant.
Profit or loss for the period and total comprehensive income are allocated in
the statement of comprehensive income to the amounts attributable to non-
controlling interest and to the parent’s owners.
Material items
The nature and amount of items of income and expense are disclosed
separately, where they are material. Disclosure may be in the statement or in
the notes. Such income/expenses might include restructuring costs; write-
downs of inventories or property, plant and equipment; litigation settlements;
and gains or losses on disposals of non-current assets.
The notes are an integral part of the financial statements. Notes provide
information additional to the amounts disclosed in the ‘primary’
statements. They include accounting policies and critical accounting
estimates and judgements.
An entity follows the accounting policies required by IFRS that are relevant
to the particular circumstances of the entity. However, for some situations,
standards offer a choice; there are other situations where no guidance is
given by IFRSs. In these situations, management should select appropriate
accounting policies.
Errors
The standards’ scopes are broad. The standards cover all types of financial
instrument, including receivables, payables, investments in bonds and shares,
borrowings and derivatives. They also apply to certain contracts to buy or sell
non-financial assets (such as commodities) that can be net-settled in cash or
another financial instrument.
In November 2009, the IASB published the first part of its three-stage project
to replace IAS 39, in the form of a new standard IFRS 9. The IASB updated
IFRS 9 in October 2010 to include guidance on classification and measurement
of financial liabilities and on derecognition of financial instruments. This first
phase deals with the classification and measurement of financial assets and
financial liabilities.
Two of the existing three fair value option criteria become obsolete under
IFRS 9, as a fair value driven business model requires fair value accounting,
and hybrid contracts are classified in their entirety at fair value. The remaining
fair value option condition in IAS 39 is carried forward to the new standard
– that is, management may still designate a financial asset as at fair value
through profit or loss on initial recognition if this significantly reduces an
accounting mismatch. The designation at fair value through profit or loss will
continue to be irrevocable.
IFRS 9’s classification principles indicate that all equity investments should
be measured at fair value. However, management has an option to present in
other comprehensive income (OCI) unrealised and realised fair value gains
and losses on equity investments that are not held for trading.
IFRS 9 removes the cost exemption for unquoted equities and derivatives on
unquoted equities but provides guidance on when cost may be an appropriate
estimate of fair value.
Amounts in OCI relating to own credit are not recycled to the income
statement even when the liability is derecognised and the amounts are
realised. However, the standard does allow transfers within equity.
Embedded derivatives that are not ‘closely related’ to the rest of the contract
are separated and accounted for as stand-alone derivatives (that is, measured
at fair value, generally with changes in fair value recognised in profit or loss).
An embedded derivative is not ‘closely related’ if its economic characteristics
and risks are different from those of the rest of the contract. IAS 39 sets out
many examples to help determine when this test is (and is not) met.
The way that financial instruments are classified under IAS 39 drives how
they are subsequently measured and where changes in measurement are
accounted for.
Financial liabilities are at fair value through profit or loss if they are
designated as such (subject to various conditions), if they are held for trading
or if they are derivatives (except for a derivative that is a financial guarantee
contract or a designated and effective hedging instrument). They are
otherwise classified as ‘other liabilities’.
Financial assets and liabilities are measured either at fair value or at amortised
cost, depending on their classification. Changes are taken to either the income
statement or to other comprehensive income.
The critical feature of a liability is that under the terms of the instrument,
the issuer is or can be required to deliver either cash or another financial
asset to the holder; it cannot avoid this obligation. For example, a debenture,
under which the issuer is required to make interest payments and redeem the
debenture for cash, is a financial liability.
The treatment of interest, dividends, losses and gains in the income statement
follows the classification of the related instrument. If a preference share is
classified as a liability, its coupon is shown as interest (assuming that coupon
is not discretionary). However, the discretionary coupon on an instrument that
is treated as equity is shown as a distribution.
Recognition
Derecognition
Assets
An entity that holds a financial asset may raise finance using the asset as
security for the finance, or as the primary source of cash flows from which
to repay the finance. The derecognition requirements of IAS 39 determine
whether the transaction is a sale of the financial assets (and therefore the
entity ceases to recognise the assets) or whether finance has been secured on
the assets (and the entity recognises a liability for any proceeds received). This
evaluation might be straightforward. For example, it is clear with little or no
analysis that a financial asset is derecognised in an unconditional transfer of it
to an unconsolidated third party, with no risks and rewards of the asset being
retained. Conversely, derecognition is not allowed where an asset has been
transferred but substantially all the risks and rewards of the asset have been
retained through the terms of the agreement. However, the analysis may be
more complex in other cases. Securitisation and debt factoring are examples
of more complex transactions where derecognition will need
careful consideration.
Liabilities
All financial assets and financial liabilities are measured initially at fair value
under IAS 39 (plus transaction costs, for financial assets and liabilities not
at fair value through profit or loss). The fair value of a financial instrument
is normally the transaction price − that is, the amount of the consideration
given or received. However, in some circumstances, the transaction price may
not be indicative of fair value. In such a situation, an appropriate fair value
is determined using data from current observable transactions in the same
instrument or based on a valuation technique whose variables include only
data from observable markets.
Financial liabilities are measured at amortised cost using the effective interest
method unless they are classified at fair value through profit or loss.
Financial assets and financial liabilities that are designated as hedged items
may require further adjustments under the hedge accounting requirements.
All financial assets are subject to review for impairment, except those measured
at fair value through profit or loss. Where there is objective evidence that
such a financial asset may be impaired, the impairment loss is calculated and
recognised in profit or loss.
Hedge accounting
For a fair value hedge, the hedged item is adjusted for the gain or loss
attributable to the hedged risk. That element is included in the income
statement where it will offset the gain or loss on the hedging instrument.
For an effective cash flow hedge, gains and losses on the hedging instrument
are initially included in other comprehensive income. The amount included
in other comprehensive income is the lesser of the fair value of the hedging
instrument and hedge item. Where the hedging instrument has a fair value
greater than the hedged item, the excess is recorded within profit or loss
as ineffectiveness. Gains or losses deferred in other comprehensive income
are reclassified to profit or loss when the hedged item affects the income
statement. If the hedged item is the forecast acquisition of a non-financial
asset or liability, the entity may choose an accounting policy of adjusting the
carrying amount of the non-financial asset or liability for the hedging gain or
loss at acquisition, or leaving the hedging gains or losses deferred in equity
and reclassifying them to profit or loss when the hedged item affects profit
or loss.
Disclosure
IFRS 7 sets out disclosure requirements that are intended to enable users
to evaluate the significance of financial instruments for an entity’s financial
position and performance, and to understand the nature and extent of risks
arising from those financial instruments to which the entity is exposed.
These risks include credit risk, liquidity risk and market risk. It also requires
disclosure of a three-level hierarchy for fair value measurement and some
specific quantitative disclosures for financial instruments at the lowest level in
the hierarchy.
IFRIC 19, which came into effect from annual periods beginning on or
after 1 July 2010, requires management to recognise a gain or loss in profit
or loss when a liability is settled through the issuance of the entity’s own
equity instruments. The amount of the gain or loss recognised in profit or
loss is the difference between the carrying value of the financial liability
and the fair value of the equity instruments issued. If the fair value of the
equity instruments cannot be reliably measured, the fair value of the existing
financial liability is used to measure the gain or loss. Management is no longer
permitted to reclassify the carrying value of the existing financial liability into
equity (with no gain or loss being recognised in profit or loss). The amount of
the gain or loss should be separately disclosed on the face of the statement of
comprehensive income or in the notes
The methods required for each of the above circumstances are summarised
below.
Assets and liabilities are translated from the functional currency to the
presentation currency at the closing rate at the end of the reporting period.
The income statement is translated at exchange rates at the dates of the
transactions or at the average rate if that approximates the actual rates. All
resulting exchange differences are recognised in other comprehensive income.
IFRS 4 applies to all issuers of insurance contracts whether or not the entity
is legally an insurance company. It does not apply to accounting for insurance
contracts by policyholders.
Revenue – IAS 18
Revenue arising from the sale of goods is recognised when an entity transfers
the significant risks and rewards of ownership and gives up managerial
involvement usually associated with ownership or control, if it is probable that
economic benefits will flow to the entity and the amount of revenue and costs
can be measured reliably.
Revenue from the rendering of services is recognised when the outcome of the
transaction can be estimated reliably. This is done by reference to the stage of
completion of the transaction at the balance sheet date, using requirements
similar to those for construction contracts. The outcome of a transaction
can be estimated reliably when: the amount of revenue can be measured
reliably; it is probable that economic benefits will flow to the entity; the stage
of completion can be measured reliably; and the costs incurred and costs to
complete can be reliably measured.
Examples of transactions where the entity retains significant risks and rewards
of ownership and revenue is not recognised are when:
• the entity retains an obligation for unsatisfactory performance not covered
by normal warranty provisions;
• the buyer has the power to rescind the purchase for a reason specified
in the sales contract and the entity is uncertain about the probability of
return; and
• then the goods are shipped subject to installation and that installation is a
significant part of the contract.
IFRIC 13, ‘Customer loyalty programmes’, clarifies the accounting for award
credits granted to customers when they purchase goods or services – for
example, under frequent-flyer or supermarket loyalty schemes. The fair value
of the consideration received or receivable in respect of the initial sale is
allocated between the award credits and the other components of the sale.
IFRIC 18, ‘Transfers of assets from customers’, clarifies the accounting for
arrangements where an item of property, plant and equipment is transferred
IFRIC 15, ‘Agreements for construction of real estate’, clarifies which standard
(IAS 18, ‘Revenue’, or IAS 11, ‘Construction contracts’) should be applied to
particular transactions.
Government grants are recognised when there is reasonable assurance that the
entity will comply with the conditions related to them and that the grants will
be received.
Grants related to income are recognised in profit or loss over the periods
necessary to match them with the related costs that they are intended to
compensate. They are either offset against the related expense or presented as
separate income. The timing of such recognition in profit or loss will depend
on the fulfillment of any conditions or obligations attaching to the grant.
Grants related to assets are either offset against the carrying amount of the
relevant asset or presented as deferred income in the balance sheet. Profit or
loss will be affected either by a reduced depreciation charge or by deferred
income being recognised as income systematically over the useful life of the
related asset.
Only certain entities are required to disclose segment information. These are
entities with listed or quoted equity or debt instruments or entities that are in
the process of obtaining a listing or quotation of debt or equity instruments in
a public market.
Where defined benefit plans are funded, the plan assets are measured at fair
value using discounted cash flow estimates if market prices are not available.
Plan assets are tightly defined, and only assets that meet the definition of plan
assets may be offset against the plan’s defined benefit obligations − that is, the
net surplus or deficit is shown on the balance sheet.
The re-measurement at each balance sheet date of the plan assets and the
defined benefit obligation gives rise to actuarial gains and losses. There are
three permissible methods under IAS 19 for recognising actuarial gains and
losses:
• Under the ‘other comprehensive income’ (OCI) approach, actuarial gains
and losses are recognised immediately in other comprehensive income.
• Under the ‘corridor approach’, any actuarial gains and losses that fall
outside the higher of 10 per cent of the present value of the defined benefit
obligation or 10 per cent of the fair value of the plan assets (if any) are
amortised over no more than the remaining working life of the employees.
• Under the income statement approach, actuarial gains and losses are
recognised immediately in profit or loss.
IAS 19 analyses the changes in the plan assets and liabilities into various
components, the net total of which is recognised as an expense or income in
the income statement. These components include:
• current-service cost (the present value of the benefits earned by active
employees in the current period);
• interest cost (the unwinding of the discount on the defined benefit
obligation);
• expected return on any plan assets (expected interest, dividends and
capital growth of plan assets);
• actuarial gains and losses, to the extent they are recognised in the income
statement (see above); and
• past-service costs (the change in the present value of the plan liabilities
relating to employee service in prior periods arising from changes to post-
employment benefits).
When plan assets exceed the defined benefit obligation creating a net surplus,
IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding
The IASB issued a revised version of IAS 19, ‘Employee benefits’, in June
2011. The revised version contains significant changes to the recognition and
measurement of defined benefit pension expense and termination benefits,
and to the disclosures for all employee benefits. The changes will affect most
entities that apply IAS 19. The amendments could significantly change a
number of performance indicators and might also significantly increase the
volume of disclosures. The new standard is effective for annual periods starting
on or after 1 January 2013. Earlier application is permitted.
The accounting treatment under IFRS 2 is based on the fair value of the
instruments. Both the valuation of and the accounting for awards can be
difficult, due to the complex models that need to be used to calculate the fair
value of options, and also due to the variety and complexity of schemes. In
addition, the standard requires extensive disclosures. The result generally is
reduced reported profits, especially in entities that use share-based payment
extensively as part of their remuneration strategy.
13 Taxation – IAS 12
IAS 12 only deals with taxes on income, comprising current and deferred
tax. Current tax expense for a period is based on the taxable and deductible
amounts that will be shown on the tax return for the current year. An entity
recognises a liability in the balance sheet in respect of current tax expense for
the current and prior periods to the extent unpaid. It recognises an asset if
current tax has been overpaid.
Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be paid to (recovered from) the taxation
authorities, using the tax rates and tax laws that have been enacted or
substantively enacted by the balance sheet date.
Tax payable based on taxable profit seldom matches the tax expense that
might be expected based on pre-tax accounting profit. The mismatch can
occur because IFRS recognition criteria for items of income and expense are
different from the treatment of items under tax law.
Deferred tax is provided in full for all temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts in the financial
statements, except when the temporary difference arises from:
• initial recognition of goodwill (for deferred tax liabilities only);
• initial recognition of an asset or liability in a transaction that is not a
business combination and that affects neither accounting profit nor taxable
profit; and
• investments in subsidiaries, branches, associates and joint ventures, but
only where certain criteria apply.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the period when the asset is realised or the liability
is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the balance sheet date. The discounting of deferred
tax assets and liabilities is not permitted.
The measurement of deferred tax liabilities and deferred tax assets reflects
the tax consequences that would follow from the manner in which the entity
expects, at the balance sheet date, to recover (that is, through use or through
sale or through a combination of both) the carrying amount of its assets
and liabilities. The expected manner of recovery for non-depreciable assets
measured using the revaluation model in IAS 16 is always through sale; there is
a rebuttable presumption that the expected manner of recovery for investment
property that is measured using the fair value model in IAS 40 is through sale.
Current and deferred tax is recognised in profit or loss for the period, unless
the tax arises from a business combination or a transaction or event that is
recognised outside profit or loss, either in other comprehensive income or
directly in equity in the same or different period. The tax consequences that
accompany, for example, a change in tax rates or tax laws, a reassessment of
the recoverability of deferred tax assets or a change in the expected manner of
recovery of an asset are recognised in profit or loss, except to the extent that
they relate to items previously charged or credited outside profit or loss.
Earnings per share (EPS) is a ratio that is widely used by financial analysts,
investors and others to gauge an entity’s profitability and to value its shares.
EPS is normally calculated in the context of ordinary shares of the entity.
Earnings attributable to ordinary shareholders are therefore determined by
deducting from net income the earnings attributable to holders of more senior
equity instruments.
Basic EPS is calculated by dividing the profit or loss for the period attributable
to the equity holders of the parent by the weighted average number of
ordinary shares outstanding (including adjustments for bonus and rights
issues).
Diluted EPS is calculated by adjusting the profit or loss and the weighted
average number of ordinary shares by taking into account the conversion of
any dilutive potential ordinary shares. Potential ordinary shares are those
financial instruments and contracts that may result in issuing ordinary shares
such as convertible bonds and options (including employee share options).
Basic and diluted EPS for both continuing and total operations are presented
with equal prominence in the statement of comprehensive income – or in the
separate income statement where one is presented – for each class of ordinary
shares. Separate EPS figures for discontinued operations are disclosed in the
same statements or in the notes.
Subsequent measurement
Intangible assets are amortised unless they have an indefinite useful life.
Amortisation is carried out on a systematic basis over the useful life of the
intangible asset. An intangible asset has an indefinite useful life when, based on
an analysis of all the relevant factors, there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for the entity.
Intangible assets with finite useful lives are considered for impairment when
there is an indication that the asset has been impaired. Intangible assets with
indefinite useful lives and intangible assets not yet in use are tested annually
for impairment and whenever there is an indication of impairment.
Property, plant and equipment (PPE) is recognised when the cost of an asset
can be reliably measured and it is probable that the entity will obtain future
economic benefits from the asset.
PPE is measured initially at cost. Cost includes the fair value of the
consideration given to acquire the asset (net of discounts and rebates) and
any directly attributable cost of bringing the asset to working condition for its
intended use (inclusive of import duties and non-refundable purchase taxes).
PPE may comprise parts with different useful lives. Depreciation is calculated
based on each individual part’s life. In case of replacement of one part, the
new part is capitalised to the extent that it meets the recognition criteria of an
asset, and the carrying amount of the parts replaced is derecognised.
IFRIC 18 clarifies the accounting for arrangements where an item of PPE that
is provided by the customer is used to provide an ongoing service.
Borrowing costs
Under IAS 23, costs are directly attributable to the acquisition, construction or
production of a qualifying asset to be capitalised.
Under IAS 40, fair value is the price at which the property could be
exchanged between knowledgeable, willing parties in an arm’s length
transaction. Under IFRS 13, which is effective from annual periods beginning
on or after 1 January 2013, fair value is defined as ‘the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date’. Changes in fair value
are recognised in profit or loss in the period in which they arise.
The basic principle of impairment is that an asset may not be carried on the
balance sheet at above its recoverable amount. Recoverable amount is defined
as the higher of the asset’s fair value less costs to sell and its value in use. Fair
value less costs to sell is the amount obtainable from a sale of an asset in an
arm’s length transaction between knowledgeable, willing parties, less costs
of disposal. Value in use requires management to estimate the future cash
flows to be derived from the asset and discount them using a pre-tax market
rate that reflects current assessments of the time value of money and the risks
specific to the asset.
All assets subject to the impairment guidance are tested for impairment where
there is an indication that the asset may be impaired. Certain assets (goodwill,
indefinite lived intangible assets and intangible assets that are not yet
available for use) are also tested for impairment annually even if there is no
impairment indicator.
A lease gives one party (the lessee) the right to use an asset over an agreed
period of time in return for payment to the lessor. Leasing is an important
source of medium- and long-term financing; accounting for leases can have a
significant impact on lessees’ and lessors’ financial statements.
reward of ownership. All other leases are operating leases. Leases of land and
buildings are considered separately under IFRS.
Under a finance lease, the lessee recognises an asset held under a finance lease
and a corresponding obligation to pay rentals. The lessee depreciates
the asset.
Under an operating lease, the lessee does not recognise an asset and lease
obligation. The lessor continues to recognise the leased asset and depreciates
it. The rentals paid are normally charged to the income statement of the lessee
and credited to that of the lessor on a straight-line basis.
Linked transactions with the legal form of a lease are accounted for on the
basis of their substance – for example, a sale and leaseback where the seller
is committed to repurchase the asset may not be a lease in substance if the
‘seller’ retains the risks and rewards of ownership and substantially the same
rights of use as before the transaction.
Equally, some transactions that do not have the legal form of a lease are in
substance leases if they are dependent on a particular asset that the purchaser
can control physically or economically.
20 Inventories – IAS 2
Inventories are valued at the lower of cost and net realisable value (NRV).
NRV is the estimated selling price in the ordinary course of business, less the
estimated costs of completion and estimated selling expenses.
IAS 2, ‘Inventories’, requires the cost of items that are not interchangeable
or that have been segregated for specific contracts to be determined on an
individual-item basis. The cost of other items of inventory used is assigned
by using either the first-in, first-out (FIFO) or weighted average cost formula.
Last-in, first-out (LIFO) is not permitted. An entity uses the same cost formula
for all inventories that have a similar nature and use to the entity. A different
cost formula may be justified where inventories have a different nature or use.
The cost formula used is applied on a consistent basis from period to period.
A liability is a ‘present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits’. A provision falls within the category
of liabilities and is defined as ‘a liability of uncertain timing or amount’
A present obligation arises from an obligating event and may take the form
of either a legal obligation or a constructive obligation. An obligating event
leaves the entity no realistic alternative to settling the obligation. If the
entity can avoid the future expenditure by its future actions, it has no present
obligation, and no provision is required. For example, an entity cannot
recognise a provision based solely on the intent to incur expenditure at some
future date or the expectation of future operating losses (unless these losses
relate to an onerous contract).
An obligation does not generally have to take the form of a ‘legal’ obligation
before a provision is recognised. An entity may have an established pattern
of past practice that indicates to other parties that it will accept certain
responsibilities and as a result has created a valid expectation on the part of
those other parties that it will discharge those responsibilities (that is, the
entity is under a constructive obligation).
Restructuring provisions
The provision includes only incremental costs resulting from the restructuring
and not those associated with the entity’s ongoing activities. Any expected
gains on the sale of assets are not considered in measuring a restructuring
provision.
Reimbursements
Subsequent measurement
Contingent liabilities
Contingent liabilities are not recognised but are disclosed and described in
the notes to the financial statements, including an estimate of their potential
financial effect and uncertainties relating to the amount or timing of any
outflow, unless the possibility of settlement is remote.
Contingent assets
Contingent assets are possible assets whose existence will be confirmed only
on the occurrence or non-occurrence of uncertain future events outside the
entity’s control. Contingent assets are not recognised. When the realisation
of income is virtually certain, the related asset is not a contingent asset; it is
recognised as an asset.
Contingent assets are disclosed and described in the notes to the financial
statements, including an estimate of their potential financial effect if the
inflow of economic benefits is probable.
Events after the reporting period are either adjusting events or non-adjusting
events. Adjusting events provide further evidence of conditions that existed
at the balance sheet date – for example, determining after the year end
the consideration for assets sold before the year end. Non-adjusting events
relate to conditions that arose after the balance sheet date – for example,
announcing a plan to discontinue an operation after the year end.
The carrying amounts of assets and liabilities at the balance sheet date are
adjusted only for adjusting events or events that indicate that the going-
concern assumption in relation to the whole entity is not appropriate.
Significant non-adjusting post-balance-sheet events, such as the issue of
shares or major business combinations, are disclosed.
Dividends proposed or declared after the balance sheet date but before
the financial statements have been authorised for issue are not recognised
as a liability at the balance sheet date. However, details of these dividends
are disclosed.
An entity discloses the date on which the financial statements were authorised
for issue and the persons authorising the issue and, where necessary, the
fact that the owners or other persons have the ability to amend the financial
statements after issue.
Equity, along with assets and liabilities, is one of the three elements used
to portray an entity’s financial position. Equity is defined in the IASB’s
Framework as the residual interest in the entity’s assets after deducting all
its liabilities. The term ‘equity’ is often used to encompass an entity’s equity
instruments and reserves. Equity is given various descriptions in the financial
statements. Corporate entities may refer to it as owners’ equity, shareholders’
equity, capital and reserves, shareholders’ funds and proprietorship. Equity
includes various components with different characteristics.
Reserves include retained earnings, together with fair value reserves, hedging
reserves, asset revaluation reserves and foreign currency translation reserves
and other statutory reserves.
Treasury shares
Non-controlling interests
Disclosures
From the date of acquisition, the parent (the acquirer) incorporates into the
consolidated statement of comprehensive income the financial performance
of the acquiree and recognises in the consolidated balance sheet the
acquired assets and liabilities (at fair value), including any goodwill arising
on the acquisition (see Section 25, ‘Business combinations – IFRS 3’).
41 IFRS pocket guide 2012
Consolidated and separate financial statements
At the same time, the IASB published IFRS 11, IFRS 12, IAS 27 (revised) and
IAS 28 (revised).
The key principle in the new standard is that control exists, and consolidation
is required only if the investor possesses power over the investee, has exposure
to variable returns from its involvement with the investee and has the ability
to use its power over the investee to affect its returns.
Under current IAS 27, control is determined through the power to govern an
entity; under SIC-12 it is through the level of exposure to risks and rewards.
IFRS 10 brings these two concepts together with a new definition of control
and the concept of exposure to variable returns. The core principle that a
consolidated entity presents a parent and its subsidiaries as if they are a single
economic entity remains unchanged, as do the mechanics of consolidation.
IFRS 10 provides guidance on the following issues when determining who has
control:
• assessment of the purpose and design of an investee;
• nature of rights – whether substantive or merely protective in nature;
• impact of exposure to variable returns;
• assessment of voting rights and potential voting rights;
• whether an investor is a principal or an agent when exercising its
controlling power;
• relationships between investors and how they affect control; and
• existence of power over specified assets only.
The new standard will affect some entities more than others. The
consolidation conclusion is not expected to change for most straightforward
entities. However, changes can result where there are complex group
structures or where structured entities are involved in a transaction. Entities
that are most likely to be affected potentially include investors in the
following entities:
• entities with a dominant investor that does not possess a majority
voting interest, where the remaining votes are held by widely-dispersed
shareholders (de facto control);
The new standard is available for early adoption, with mandatory application
required from 1 January 2013. The standard still has to be endorsed by the
EU for use by European companies.
IFRS 10 does not contain any disclosure requirements; these are included
within IFRS 12. IFRS 12 has greatly increased the amount of disclosures
required. Reporting entities should plan for, and implement, the processes
and controls that will be required to gather the additional information. This
may involve a preliminary consideration of IFRS 12 issues, such as the level
of disaggregation required.
The consideration for the combination includes cash and cash equivalents and
the fair value of any non-cash consideration given. Any equity instruments
issued as part of the consideration are fair valued. If any of the consideration
is deferred, it is discounted to reflect its present value at the acquisition date,
if the effect of discounting is material. Consideration includes only those
amounts paid to the seller in exchange for control of the entity. Consideration
excludes amounts paid to settle pre-existing relationships, payments that are
contingent on future employee services and acquisition-related costs.
Goodwill is recognised for the future economic benefits arising from assets
acquired that are not individually identified and separately recognised.
Goodwill is the difference between the consideration transferred, the amount
of any non-controlling interest in the acquiree and the acquisition-date fair
value of any previous equity interest in the acquiree over the fair value of the
identifiable net assets acquired. If the non-controlling interest is measured at
its fair value, goodwill includes amounts attributable to the non-controlling
interest. If the non-controlling interest is measured at its proportionate share
of identifiable net assets, goodwill includes only amounts attributable to the
controlling interest – that is, the parent.
The non-current asset (or disposal group) is classified as ‘held for sale’ if it is
available for its immediate sale in its present condition and its sale is highly
probable. A sale is ‘highly probable’ where: there is evidence of management
commitment; there is an active programme to locate a buyer and complete
the plan; the asset is actively marketed for sale at a reasonable price
compared to its fair value; the sale is expected to be completed within
12 months of the date of classification; and actions required to complete the
plan indicate that it is unlikely that there will be significant changes to the
plan or that it will be withdrawn.
Non-current assets (or disposal groups) classified as held for sale are:
• carried at the lower of the carrying amount and fair value less costs to sell;
• not depreciated or amortised; and
• presented separately in the balance sheet (assets and liabilities should not
be offset).
Associates are accounted for using the equity method unless they meet the
criteria to be classified as ‘held for sale’ under IFRS 5. Under the equity
method, the investment in the associate is initially carried at cost. It is
increased or decreased to recognise the investor’s share of the profit or loss
of the associate after the date of acquisition.
IAS 28 has been amended and now includes the requirements for joint
ventures, as well as associates, to be equity accounted.
Joint ventures fall into three categories: jointly controlled entities, jointly
controlled operations and jointly controlled assets. The accounting treatment
depends on the type of joint venture.
Jointly controlled operations and jointly controlled assets do not involve the
creation of an entity that is separate from the venturers themselves. In a joint
operation, each venturer uses its own resources and carries out its own part
of a joint operation separately from the activities of the other venturer(s).
Each venturer owns and controls its own resources that it uses in the joint
operation. Jointly controlled assets involve the joint ownership of one or
more assets.
The IASB issued IFRS 11 in May 2011 to replace IAS 31. A joint arrangement
is a contractual arrangement in which at least two parties agree to share
control over the activities of the arrangement. Unanimous consent over
decisions about relevant activities is required in order to meet the definition of
joint control.
Joint operations are often not structured through separate vehicles. Each
operator has rights to assets and obligations to liabilities, which is not limited
to their capital contribution.
Joint operators account for their rights to assets and obligations for
liabilities. Joint venturers account for their interest by using the equity
method of accounting.
Other subjects
Finance providers are not related parties simply because of their normal
dealings with the entity.
Management discloses the name of the entity’s parent and, if different, the
ultimate controlling party (which could be a person). Relationships between
a parent and its subsidiaries are disclosed irrespective of whether there have
been transactions with them.
The cash flow statement is one of the primary statements in financial reporting
(along with the statement of comprehensive income, the balance sheet and
the statement of changes in equity). It presents the generation and use of ‘cash
and cash equivalents’ by category (operating, investing and finance) over
a specific period of time. It provides users with a basis to assess the entity’s
ability to generate and utilise its cash.
Management may present operating cash flows by using either the direct
method (gross cash receipts/payments) or the indirect method (adjusting net
profit or loss for non-operating and non-cash transactions, and for changes in
working capital).
Cash flows from investing and financing activities are reported separately
gross (that is, gross cash receipts and gross cash payments) unless they meet
certain specified criteria.
The cash flows arising from dividends and interest receipts and payments are
classified on a consistent basis and are separately disclosed under the activity
appropriate to their nature. Cash flows relating to taxation on income are
classified and separately disclosed under operating activities unless they can
be specifically attributed to investing or financing activities.
The total that summarises the effect of the operating, investing and financing
cash flows is the movement in the balance of cash and cash equivalents for
the period.
Entities may either prepare full IFRS financial statements (conforming to the
requirements of IAS 1) or condensed financial statements.
There are special measurement requirements for certain costs that can only
be determined on an annual basis (for example, items such as tax that is
Under both the financial asset and the intangible asset models, the operator
accounts for revenue and costs relating to construction or upgrade services in
accordance with IAS 11. The operator recognises revenue and costs relating
to operation services in accordance with IAS 18. Any contractual obligation to
maintain or restore infrastructure, except for upgrade services, is recognised
in accordance with IAS 37.
The report also explains the relationship between the actuarial present
value of promised retirement benefits, the net assets available for benefits
and the policy for the funding of promised benefits. Investments held by all
retirement plans (whether defined benefit or defined contribution) are
carried at fair value.
The IASB issued IFRS 13 as a common framework for measuring fair value
when required or permitted by another IFRS. IFRS 13 defines fair value as
‘The price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date’. The key principle is that fair value is the exit price from the perspective
of market participants who hold the asset or owe the liability at the
measurement date. It is based on the perspective of market participants rather
than just the entity itself, so fair value is not affected by an entity’s intentions
towards the asset, liability or equity item that is being fair valued.
In our view, IFRS 13 is largely consistent with valuation practices that already
operate today. IFRS 13 is therefore unlikely to result in substantial change in
many cases. However, it introduces a few changes:
• the introduction of a fair value hierarchy for non-financial assets and
liabilities, similar to what IFRS 7 currently prescribes for financial
instruments;
• a requirement for the fair value of all liabilities, including derivative
liabilities, to be determined based on the assumption that the liability
will be transferred to another party rather than otherwise settled or
extinguished;
• the removal of the requirement to use bid and ask prices for actively-
quoted financial assets and financial liabilities respectively. Instead, the
most representative price within the bid-ask spread should be used; and
• the introduction of additional disclosures related to fair value.
IFRS 13 addresses how to measure fair value but does not stipulate when fair
value can or should be used.
Industry-specific topics
35 Agriculture – IAS 41
All biological assets are measured at fair value less costs to sell, with the
change in the carrying amount reported as part of profit or loss from operating
activities. Agricultural produce harvested from an entity’s biological assets is
measured at fair value less costs to sell at the point of harvest.
The fair value is measured using an appropriate quoted price where available.
If an active market does not exist for biological assets or harvested
agricultural produce, the following may be used in determining fair value: the
most recent transaction price (provided that there has not been a significant
change in economic circumstances between the date of that transaction and
the balance sheet date); market prices for similar assets, with adjustments to
reflect differences; and sector benchmarks, such as the value of an orchard
expressed per export tray, bushel or hectare and the value of cattle expressed
per kilogram of meat. When any of this information is not available, the entity
uses the present value of the expected net cash flows from the asset
discounted at a current market-determined rate.
One of the most significant changes expected with regard to the fair value
measurement of biological assets as a result of IFRS 13 is the market to
which the entity should look when measuring fair value. IAS 41 currently
requires the use of entity-specific measures when measuring fair value,
while IFRS 13 looks to the principal market for the asset. The fair value
measurement should represent the price in that market (whether that price
is directly observable or estimated using another valuation technique), even
IFRS 6 addresses the financial reporting for the exploration for and evaluation
of mineral resources. It does not address other aspects of accounting by
entities engaged in the exploration for and evaluation of mineral reserves
(such as activities before an entity has acquired the legal right to explore or
after the technical feasibility and commercial viability to extract resources
have been demonstrated).
Activities outside the scope of IFRS 6 are accounted for according to the
applicable standards (such as IAS 16, IAS 37 and IAS 38.)
Exploration and evaluation assets are initially measured at cost. They are
classified as tangible or intangible assets, according to the nature of the
assets acquired. Management applies that classification consistently. After
recognition, management applies either the cost model or the revaluation
model to the exploration and evaluation assets, based on IAS 16 or
IAS 38, according to nature of the assets. As soon as technical feasibility and
commercial viability are determined, the assets are no longer classified as
exploration and evaluation assets.
The exploration and evaluation assets are tested for impairment when facts
and circumstances suggest that the carrying amounts may not be recovered.
The assets are also tested for impairment before reclassification out of
exploration and evaluation. The impairment is measured, presented and
disclosed according to IAS 36 except that exploration and evaluation assets are
allocated to cash-generating units or groups of cash-generating units no larger
than a segment. Management discloses the accounting policy adopted, as well
as the amount of assets, liabilities, income and expense and investing cash
flows arising from the exploration and evaluation of mineral resources.
IFRIC 20 sets out the accounting for overburden waste removal (stripping)
costs in the production phase of a mine. The interpretation may require
mining entities reporting under IFRS to write off existing stripping assets to
opening retained earnings if the assets cannot be attributed to an identifiable
component of an ore body.
Stripping costs incurred once a mine is in production often provide benefits for
current production and access to future production. The challenge has always
been how to allocate the benefits and then determine what period costs are
versus an asset that will benefit future periods. The IFRIC was developed to
address current diversity in practice. Some entities have judged all stripping
costs as a cost of production, and some entities capitalise some or all stripping
costs as an asset.
IFRIC 20 applies only to stripping costs that are incurred in surface mining
activity during the production phase of the mine. It does not address
underground mining activity or oil and natural gas activity. Oil sands, where
extraction activity is seen by many as closer to that of mining than traditional
oil and gas extraction, are also outside the scope of the interpretation.
IFRS pocket guide 2012 is designed for the information of readers. While every effort has been made to
ensure accuracy, information contained in this publication may not be comprehensive or may have been
omitted which may be relevant to a particular reader. In particular, this booklet is not intended as a study of
all aspects of International Financial Reporting Standards and does not address the disclosure requirements
for each standard. The booklet is not a substitute for reading the Standards when dealing with points of
doubt or difficulty. No responsibility for loss to any person acting or refraining from acting as a result of any
material in this publication can be accepted by PricewaterhouseCoopers LLP. Recipients should not act on
the basis of this publication without seeking professional advice.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited,
each member firm of which is a separate legal entity.